What Is A Hedge Fund And How To Invest Like One

If your only information about investing comes from popular media, you’ve probably heard of hedge funds. Most people think of hedge funds as investments for the uber-wealthy that generate enormous investment returns.

Is that the case? And can a regular person like you invest in a hedge fund?

Let’s take a look at traditional hedge funds, and how disrupters like Titan (an app built like a hedge fund) are creating more access for everyone. We partner with Titan to look at hedge funds and how their app is changing the game.

If you want to skip ahead, check out Titan here and see how they’re changing the game >>

What Is A Hedge Fund?

At its very core, a hedge fund is fairly simple. An investment manager manages a pool of money for limited partners. Often the limited partners are members of a wealthy family or business partners.

One of the most important characteristics of hedge funds is concentration. Whereas a vanilla ETF usually replicates the performance of hundreds of securities (e.g., an S&P 500 ETF replicates the 500 stocks in the index), a hedge fund is much more concentrated in the hopes of outperforming. For instance, some of the more classic hedge funds will often only own 15-30 stocks, but do rigorous amounts of research in selecting them.

The term hedge fund derives from the ability of the fund to “hedge” its investments. Often times, a portfolio manager will bet against stocks in addition to buying them. For example, the manager may invest in Amazon while simultaneously betting against brick and mortar retailers.

However, the term can be applied broadly. For example, while Warren Buffett’s Berkshire Hathaway technically isn’t a hedge fund (they don’t bet against anything), it is often mentioned in the same breath given its concentrated strategy: invest only in a concentrated basket of securities.

Hedge fund managers also have the ability to “lock in” money for as long as several years. This ensures that the manager can properly manage the investments without investors pulling out of the fund.

Because investment managers have so much latitude to their investing techniques, most hedge funds are only open to wealthy people called accredited investors. Some hedge funds even require net worth in the multiple millions of dollars before you can invest.

Are Hedge Funds Good Investments?

Hedge funds may be designed to deliver long-term outperformance given their concentrated nature.

However, that doesn’t mean that hedge funds would make a good investment for you. On average, hedge funds have the following unfavorable characteristics:

• High fees. A typical hedge fund charges a 2% annual fee plus 20% of all profits.
• Lock up your money. As a hedge fund investor, you may not be able to get your money when you need it. Fund managers may legally lock you out of your investment for one to five years.
• Very complex. Fund managers can invest in everything from credit default swaps (yes, like in the movie the Big Short) to options against beef and everything in between.
• Risky techniques. While many hedge funds are designed to reduce volatility, the tools used are often viewed as risky. For example, a fund manager may leverage a portfolio which amplifies both gains and losses.

With these issues at play, most hedge funds aren’t a great investment for everyday people.

Titan - Making Hedge Funds More Accessible

Titan has also outperformed other online investment advisors like Wealthfront and Betterment, based on the most aggressive risk profiles that those advisors offer. Note that Titan’s Flagship strategy is different from Wealthfront’s and Betterment’s strategies in terms of portfolio construction and asset allocation.

More Details On Titan

Since Titan uses algorithms and machine learning to invest your money, it probably sounds a bit like a robo-advisor.

However, the company also commits to taking the black box away from investing. Instead of only showing a chart of performance, Titan’s users get regular access to digestible investing insights.

As an investor, you’ll get short videos about what a stock market change means for your portfolio. You can also request deep dives, so you can understand each of the 20 stocks in your portfolio. Another cool feature? These notes are available via audio, so you can listen on your daily commute.

Titan charges no fees on accounts less than $500. They charge a fee of 1% of assets under management for accounts with $500 or more. That means you will pay $10 for every $1,000 in you have invested with Titan.

Titan’s fees are higher than most robo-advisors. But at 1% of your portfolio, the fee Titan charges is a bargain compared with the 2% management fee plus 20% profit fee charged by most hedge fund managers.

All opinions are our own. This is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services. Titan uses a proprietary algorithmic strategy in selecting recommendations to advisory clients. Please see Titan’s website (https://www.titanvest.com/) and the Program Brochure (available on the website) for more information. Certain investments are not suitable for all investors. Before investing, consider your investment objectives and Titan’s fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. Titan’s registration as an SEC registered investment adviser does not imply a certain level of skill or training and no inference to the contrary should be made. Nothing here should be considered as an offer, solicitation of an offer, or advice to buy or sell securities. The above content is for illustrative purposes only to demonstrate products, services and information available from Titan. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections, are hypothetical in nature and may not reflect actual future performance. Performance results are net of fees and include dividends and other adjustments. All performance figures represent performance of a hypothetical account created on Titan’s inception date of 2/20/18 using Titan’s investment process for an aggressive portfolio, not an actual account. All Titan performance results include the use of a personalized hedge for a hypothetical client with an “Aggressive” risk profile; clients with “Moderate” or “Conservative” risk profiles would have experienced lower returns. Please visit https://support.titanvest.com/investment-process/hedging for full disclosures on our hedging process. Whereever Titan's Flagship strategy performance results are shown alongside other investment managers' comparable results, “Inception Date” is defined as 2/20/18 (or 2/28/18 for Betterment and PCI). 2020 YTD results are measured from 1/1/20 through 1/31/20. 2018 results are measured from Inception Date through 12/31/18. All-Time (Annualized) represents internal rate of return from Inception Date through 1/31/20. Results for the Titan Flagship investment strategy as compared to the performance of Illustrative Benchmarks is for informational purposes only. “Illustrative Benchmarks” include the Betterment 100% Stock Portfolio ("Betterment"), Wealthfront Taxable Risk Score 10.0 Portfolio ("Wealthfront"), Standard & Poor’s 500 Index (the “S&P 500”), and the ARC USD Equity Risk Private Client Index ("PCI"). Titan’s investment program does not mirror that of the Illustrative Benchmarks and the volatility may be materially different from the volatility of Illustrative Benchmarks. Reference or comparison to an Illustrative Benchmark does not imply that Titan’s Flagship strategy will be constructed in the same way as the Illustrative Benchmark or achieve returns, volatility, or other results similar to those of the Illustrative Benchmark. Performance results were prepared by Titan Invest, and have not been compiled, reviewed or audited by an independent accountant. Performance estimates are subject to future adjustment and revision. Investors should be aware that a loss of investment is possible. Additional information, including (i) the calculation methodology; and (ii) a list showing the contribution of each holding to the portfolio’s performance during the time period will be provided upon request. See Titan’s website for full performance disclosures (https://www.titanvest.com/disclosures) on Titan and the Illustrative Benchmarks. By signing up for Titan from this page, you acknowledge your receipt of the Wrap Fee Brochure and Solicitor Partner Compensation Disclosure. In addition, you understand the new account opening requirements. Solicitors may receive compensation for funded account openings on the Titan app that occur through this referral landing page.